{
  "docId": "019dd923-622c-750b-8b96-0238cb402647",
  "docSlug": "0900eea60013",
  "documentTitle": "New Oriental Education & Technology Group (EDU)",
  "authorId": "51_Muddy_Waters",
  "authorName": "Carson Block",
  "documentKindSlug": "research-note",
  "documentKindLabel": "Research note",
  "sourceTypeSlug": "short_seller",
  "sourceTypeLabel": "Short seller",
  "presentationDate": "2012-07-18 00:00:00",
  "orientation": "portrait",
  "aspectRatio": 0.7070758,
  "pageNumber": 5,
  "pageCount": 97,
  "prevPage": 4,
  "nextPage": 6,
  "slideType": "preempt_rebuttal",
  "function": "preempt_rebuttal",
  "density": "overcrowded",
  "nDataPoints": 1,
  "notes": "This is a page from a Muddy Waters research report on New Oriental Education (EDU).",
  "elementsJson": [
    "paragraph",
    "footnote"
  ],
  "metadataConfidence": 0.95,
  "imagePath": null,
  "slideHref": "/slides/019dd923-622c-750b-8b96-0238cb402647/5",
  "deckHref": "/decks/019dd923-622c-750b-8b96-0238cb402647",
  "deckJsonHref": "/decks/019dd923-622c-750b-8b96-0238cb402647.json",
  "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-0238cb402647#slide-5",
  "components": [
    {
      "bbox": null,
      "kind": "callout",
      "text": "We cannot reliably value EDU without more information. In our view, it is probable that EDU will have a substantial restatement.",
      "attrs": null,
      "subkind": null,
      "toolName": "Visual emphasis",
      "toolSlug": "visual-emphasis",
      "confidence": null,
      "componentId": "019dd952-e6ec-7186-b7c6-e93ce2ab813e",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.16,
        "w": 0.82,
        "x": 0.09,
        "y": 0.52
      },
      "kind": "paragraph",
      "text": "Perhaps the most twisted aspect of the EDU story is its corporate structure. Because EDU is a VIE, EDU shareholders of course do not own the operating company – Chairman Yu does. (See infra EDU’s VIE: All Hat and No Cattle) The VIE structure provides a significant opportunity for management to abuse shareholders. EDU’s VIE lacks many standard VIE investor protections, which we believe reflects management’s bad faith. Even stranger, the schools the VIEs established do not actually belong to the VIE. By PRC law, these schools “not requiring reasonable returns” belong to the government, with the assets (including retained earnings) belonging to the state upon windup. EDU’s ultimate valuation should reflect that the Company structure is a VIE that consolidates schools ultimately belonging to the state.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "44e7d82a-ea1a-4761-89b6-b9cbe03c3932",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.06,
        "w": 0.82,
        "x": 0.09,
        "y": 0.07
      },
      "kind": "paragraph",
      "text": "The reality is that the for profit education industry suffers from the competitive difficulties that afflict most businesses in China – low barriers to entry that spawn numerous copycat businesses, and result in greatly reduced margins due to commoditization of the product.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "4ca4d570-9f98-4a5a-b43c-15ed8838e76e",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.07,
        "w": 0.82,
        "x": 0.09,
        "y": 0.44
      },
      "kind": "paragraph",
      "text": "We cannot reliably value EDU without more information. In our view, it is probable that EDU will have a substantial restatement. The evidence of significant wrongdoing is so compelling and will likely lead EDU’s auditor, Deloitte, to numerous other problematic discoveries. We therefore think that an auditor resignation is probable.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "5e53aa80-c614-47d4-a65e-2a2b8bbc89f6",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.04,
        "w": 0.82,
        "x": 0.09,
        "y": 0.69
      },
      "kind": "paragraph",
      "text": "For retail investors who missed out on the opportunity to buy CDO-squareds while jealously watching Icelandic pension funds snatch them up, you can buy your very own piece of financial engineering through EDU shares.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "7868a874-b780-48b7-a28a-eb3ef22989cf",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.11,
        "w": 0.82,
        "x": 0.09,
        "y": 0.32
      },
      "kind": "paragraph",
      "text": "Understanding that franchise fees have most likely been disguised as company cash and consolidating results from franchisees would be a good start toward demonstrating the shortfall. As Peregrine Financial Group showed us just last week, little more than an inkjet printer and P.O. box are needed to forge hundreds of millions of dollars of cash balances in the U.S. Given EDU’s cash balance numbers are unreliable, it appears the Company needs another rebuttal. Unfortunately, EDU did not attempt to rebut some of the more specific allegations in the OLP reports.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "b963e0c2-a4c1-411f-961e-3d3fd1049e3f",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.08,
        "w": 0.82,
        "x": 0.09,
        "y": 0.14
      },
      "kind": "paragraph",
      "text": "Muddy Waters is not the first firm to conclude that EDU is committing fraud. In November 2011, OLP Global LLC (“OLP”) released two reports to its clients that postulate EDU has overstated profits by over 50% between FY 2007 and FY 2010 by failing to eliminate intercompany transactions. EDU defended itself by pointing to its audited cash balances. EDU’s November 20, 2011 press release response stated in part:",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "e7e1042c-ca9d-4d80-b925-cb5781a151b0",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.05,
        "w": 0.77,
        "x": 0.14,
        "y": 0.25
      },
      "kind": "quote",
      "text": "For OLP Global’s allegations to hold an indicia of credibility or logic, its report would need to demonstrate a US$137 million shortfall in New Oriental’s cash balance from the Company’s alleged overstating of net income...",
      "attrs": null,
      "subkind": "pull-quote",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "1c880c1f-7dbb-41aa-9cdf-087ca4ae0f8f",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": null,
      "kind": "quote",
      "text": "For OLP Global’s allegations to hold an indicia of credibility or logic, its report would need to demonstrate a US$137 million shortfall in New Oriental’s cash balance from the Company’s alleged overstating of net income... — New Oriental Education & Technology Group (November 20, 2011 press release)",
      "attrs": null,
      "subkind": null,
      "toolName": "Authority citation",
      "toolSlug": "authority-citation",
      "confidence": null,
      "componentId": "019dd952-e6ec-7186-b7c6-efa9df581740",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.05,
        "w": 0.82,
        "x": 0.09,
        "y": 0.88
      },
      "kind": "source-note",
      "text": "8 Subjects of negative Muddy Waters research reports invariably respond that MW does not understand XYZ industry. The author of the OLP report, Adele Mao, covered China education companies for Susquehanna International Group. 9 http://investor.neworiental.org/phoenix.zhtml?c=197416&p=irol-newsArticle_Print&ID=1632247&highlight=",
      "attrs": {
        "numbered": true
      },
      "subkind": null,
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "9d067688-d758-468d-93b2-0982e4518317",
      "frameworkName": null,
      "frameworkSlug": null
    }
  ],
  "metrics": [],
  "tools": [],
  "frameworks": [],
  "arcBeats": [
    {
      "to": 20,
      "from": 5,
      "beatId": "e3846e8e-4c09-4695-9dc4-32ebd1a71686",
      "arcName": "Overcoming the Monster",
      "arcSlug": "overcoming-monster",
      "beatName": "The Alleged Fraud",
      "beatSlug": "overcoming-monster-the-monster",
      "evidence": "The report presents evidence of alleged financial misreporting and fraud",
      "position": 1,
      "confidence": 0.8,
      "parentBeatName": "Hook",
      "parentBeatSlug": "hook"
    }
  ],
  "loops": [
    {
      "to": 15,
      "from": 5,
      "name": "Pattern Hunter",
      "slug": "02-pattern-hunter",
      "bestFor": "Time-pressed audiences, building consensus, when data is strong",
      "matchId": "f9d9d6a5-d4d5-419d-a67e-2765be94ba81",
      "evidence": "The report searches for and finds patterns of alleged financial misreporting",
      "position": 0,
      "objective": "To identify patterns of financial misreporting",
      "structure": "Evidence A -> Evidence B -> Evidence C -> Pattern/Conclusion",
      "confidence": 0.7,
      "description": "Group multiple pieces of evidence that together point to a pattern or conclusion"
    }
  ],
  "imagePathAlt": null,
  "thumbSrc": null,
  "thumbSrcAlt": null,
  "locked": true
}